Hi Mudit
I feel the context is different. For retail, the success depends on the location, parking, access etc
Thus having an appropriate location (and for long term) it makes sense to own the property (land or otherwise retail space)
In the long term, the saving in rentals (and escalations, etc) versus the cost of the asset ( and also the WACC) would come into play
Lastly it does increase the fixed assets, reduce some cost (increase in profit) so sort of balances the ROE/ROCE percentages
We also do need to consider whether this increases the liabilities ( LT loans) or from internal accruals
These are the factors to decide on the merits of owning versus renting
I recently visited a DMART store in Bengaluru, which has started selling as well(I donāt know since when they are selling it as I moved in to this area recently).
Pizzasā cost were really cheap(ā¹99 - ā¹159) and taste was decent. I even saw few people buying multiple Pizzas and taking them home. I think they are selling ~500 orders(not Pizza, but order) per day from that store only. So even if I assume ~ā¹200 / order, a single store is earning ā¹1L / day of revenue. Considering that they just have ~10SKUs(4-5 Pizza, all with same size + 4-5 cold drinks) and very low cost, this was really good to see. Public reviews are great too: DMart Pizza
If DMART will scale it to even 25% of their stores, it will add ~ā¹300 Cr of topline with ~20-30% of net margin without much hassle in next year. This seems like too good to be true to me. Please enlighten me if Iāve wrong assumptions here.
Disclaimer: I have extremely limited understanding of food sector and itās scaling challenges. People will working experience in this sector can suggest.
its been years here in hadapsar store of Pune city. started with ice cream softy cone, then added branded icecreams and popcorn etcā¦all at the exit gate of the store. so after shopping, one is exhausted and will look for something quick to eatā¦so yes it is a good idea as it seems to me.
I had also seen popcorns and ice-creams at few DMART stores earlier. But seeing them selling Pizza with itās volume and scale pleasingly surprised me!
So my view is different here. If you see the numbers of the food division which are published separately you will see that this division is not earning profit. I think this company is trying to build a reason for customers to visit their stores and do that by selling what customers and kids love to eat at prices where they will break even and what will keep attracting footfalls to the store. Long term I donāt think they are doing this to add to their profits but just make people come more to their stores
Most of the challenge around recovery of the general merchandise and apparel segment are now over and it is seeing a recovery
Broad principle on expansion remains around the earlier stated strategy of opening more stores in existing clusters
The strategy around ecommerce business is to not grow very fast before improving the existing business model
41 new stores were opened and policy will be to maintain either equal to or more number of stores than opened this year
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The trend in general merchandise and apparel both have seen an upward trend and in the last two quarters apparel has seen the highest growth among all internal categories
There were leadership issues in the apparel side which have been corrected and trend points in the upwards direction
Quite confident of expanding the ecommerce business with the model pointed towards getting higher revenues from larger metros
Not entering into quick commerce and will take own route in this segment and quite confident of growing well
The company has the capacity to deliver on annual store openings of 40-50 with enough inventory on hand and in another 2 years the idea is to work towards annual store openings of 60-70 a year but this will happen in a lumpy fashion
The idea is to have a 15% annual enhancement on store openings to the cumulative stores opened till date
In brick n mortar stores there is still no case to sell fresh produce profitably until the roadside vendors exist
The focus is on building larger stores because as GDP per capita picks up and the propensity to spend increases would want to be ready for that
As a retailer there is a choice that comes with better bargaining power which is either better value to customer or higher gross margins and the management continues to use it appropriately
Private labels come in play when the per capita inches above $7000 per capita and branded companies in India are very competitive and with good quality so it is very tough to work around this and the whole private label play will take a lot of time to grow big
The entire thinking is around how the company will look like post 10 years from now and what quality of talent will be required to run the company at that size
The range of store openings for the next three years is around 40-60 stores and the only challenge to that is unpredictability of regulatory challenges
Today in ecommerce business 86% of the deliveries happen between 24 hours and 45% happen within 12 hours. The rest are by customers who pre decide a late date of delivery
The broad ethos is to work in a fashion which becomes easy for everyone to notice but difficult for anyone to follow
The home delivery model is a better model and the numbers prove it and in large towns home delivery seems to be the way to go and whatever it takes to build fulfillment centers in large towns is what the company will do so that delivery can happen within 12 hours to the customer
There is a clear segmentation in terms of convenience model tilting towards home delivery and value model shifting towards larger stores and thus pickup points are somewhere in the middle and not really solving a problem which is why many pickup points are now being shut down
In last five years the store cohort in towns with less than 5 lakh population has gone up from 21% to now at 29%
Not just food inflation but even wage inflation in the lower strata of society has also been huge
Even in the digital business the company will keep the proposition of value intact which is what the parent company stands for
From an opportunity standpoint the general merchandise category is larger than the apparel category
The real driver of growth rate is accelerated store expansion
The core business model of the company has such a long growth runway that if the focus is diverted towards other monetizing aspects it will dilute the focus on the core business which in itself has a very large growth runway
The number one priority is customer pull and D2C brands which have grown to a little scale and now grow to a much larger company as per customer preference come to DMART
If we take a 3-5 year period land prices have gone up in many of the small towns and cities
Around 232 locations of DMART Ready have been shut down over the last 12 months
In terms of cost of operation DMART ecommerce model is far better than quick commerce which operate relatively at a higher cost while in terms of gross margins quick commerce companies have a better margin than DMART ecommerce because they operate primarily on convenience
The average basket value of the shoppers went up post covid and that has maintained at the same trend since then and the whole idea of the purchasing team is to catch trends and be relevant for the shopper on an ongoing basis
95% of the apparel that the company sells is private label and not branded products per se
The ecommerce business now has its operating model in place especially from a cost perspective and there is no restriction to the team on the growth path but now the pace of growth depends upon capability and execution per se
The belief maintains to be that value segment will be a larger segment than convenience and hence would like to remain within the space of value in both digital and brick and mortar space
Distribution centers are not built while entering a newer state and once store reaches critical mass in a new state distribution centers are opened
The ability to sell non FMCG products in ecommerce model is not as easy as in the offline stores and thus it is the assortment which will drive the margins in ecommerce
The core focus areas for the management continue to be on footfalls, basket value, conversions and overall LFL growth rates
The biggest challenge of scale is how the business will be managed and hence focus is on building up capabilities and thus perception of brand should not diminish to customers, vendors and even employees
The earlier thought was that whether a Minimax store could be merged with a pickup point which could be a better omni channel play and this still remains a work in progress for now and the operating metrics in this segment are better than pure play ecommerce business. However it is still not in a phase where it can be scaled up to 5000-10000 stores
Not contemplating getting into wholesale offline retail
I stay in South Bangalore and have always been fascinated by the massive crowds in Dmart stores nearby. My parents prefer Dmart, but I generally prefer to go to the More store - similar distance but much, much less crowded!
In my experience, while on an average, the prices at Dmart are a tad cheaper than More, the difference though wont be more than 3% - 5%. Why then does Dmart do more than 5x the sales per sqft than what More does?
For the longest time, I have connected this user behaviour to 2 possible factors:
Better branding/perception that Dmart is the lowest cost provider
An average Indian loving a good deal more than anything else
But I myself havenāt been entirely convinced of the above, for 2 reasons:
What about the premiumisation theme? Would people not be willing to pay slightly more for a better (read - running around with your cart in More vs. constantly being hit / apologising to my fellow shoppers in Dmart) shopping experience!
If pricing was that critical a factor, how would you then justify the massive adoption of quick commerce and food delivery applications?
Then, a couple of days ago, we had a family friend and his mother visit us for lunch. While discussing they mentioned that they shop for groceries exclusively at Dmart and not at Star (which is just opposite to their home). Intrigued, I asked them to elaborate.
So, while they frequently visit Star for fresh fruits and veggies, their reason for buying all their groceries from Dmart was that they have observed that the rice/pulses/etc. that they buy from Dmart lasts much longer than that from Star, or any other store nearby store.
I am fairly certain that the above are commodity products where sourcing is pretty much the same for all key retailers. What then is the difference? Inventory Turns
This now makes so much more sense:
Lower Prices ā Higher footfalls ā Faster Replenishment ā Fresh Inventory ā Higher Footfalls ā Lower Prices. A very strong flywheel!
Inventory turns, as it turns out may not be just a critical financial metric, but a very strong customer requirement as well!
Disclosure: I do not own any shares in Dmart / Amazon / Trent
Good observation and conclusion of this consumer behaviour. I am sure if you talk to n number of people who like dmart, they will present you with n different reasons other than cost that even they may not be aware until asked to thinkā¦and same would be true for say a
Starā¦eventually the ones which will stand tall and survive, will have few strong distinct positioning which will drive their set of consumersā¦rest will gradually perish, be acquired or create something newā¦
Good observation. Thanks
Does the story connects with numbers? (taken this line from Prof Aswath D)
Yes.
Asset turnover ratio of Dmart is 2.59 which is slightly higher even vs walmart (2.57). And same is much higher than indian counterpart of Vmart (1.0) and Baazar (0.96).
I visit DMart, More, and Ratnadeep regularly. My observations:
Ratnadeep and More are mainly competition to local kirana shops. They are good for short shelf life items like milk, breads, and stuff we forget. Even that, we only go there since they are nearer to our place than DMart. If a DMart was nearby, we are likely to buy these there!
The prices are almost always MRP when it comes to Ratnadeep. There are occasional offers at More, yet we rarely see prices that come any close to DMart prices.
Our DMart is much larger store compared to More or Ratnadeep. Variety and items are more compared to other retailers. DMart might be missing a few items still (e.g. mosquito repellent dots). We usually buy those odd items from other retailers.
DMart crowd is not a problem for us anymore as we found specific days and timings that mostly avoids the congestion. We plan accordingly. It is just one visit. Itās been a while since I felt that crowded feeling. We also order on DMart Ready as we have convenient pickup center nearby.
On an average DMart/Dmart Ready saving is almost 30% on MRP for us. Long term avg, only based on our needs and choices. For example, we switched from Lifebuoy hand wash liquid to DMart private label one as weāre happy with the quality and the other brands donāt add much/any value for the extra price. But we stick to our preferred brand for certain items like Mayonnaise, ketchup, etc.
I donāt know if price difference across retailers differ significantly based on the zone/area/locality.
This acquisition makes sense. Many Dmart stores have a lot of parking space. And with the amount of footfalls they get every weekend, there are a lot of vehicles going in and out of that store.
They probably want to set up charging stations in their parking lots, so that customers with EVs can charge their vehicles while shopping. I donāt see this acquisition to have a direct impact on the core business. It is a move to create a better shipping experience and increase their services at their stores.
I think this is probably just a captive power plant for own needs. Typically this is sourcing renewable power as part of their ESG approach, and if they use more than 51% of the power, they need to take a minimum of 26% stake. Many companies are following this practice. A quick google search came up with this Supreme Court Clarifies Ownership, Consumption Terms for Captive Power Projects.
Avenue Supermarts (DMart) came out with an IPO in 2017 with a price band of 299 and got listed around 616, giving IPO investors more than 100% returns. Since then the stock rallied to an all time high of 5485 and currently trading at 3986 with a 27% discount from its recent high.
DMart operates in a high growth retail sector and hence commands a high PE close to 100. The stock had a median PE of 125 since its listing and the lowest PE was around 90.
Currently it is trading at a PE of 96, indicating a limited downside and a huge margin of safety. This is a consistent compounding high quality stock, which provides a strong value buying opportunity during significant corrections.
The promoters hold 75% of the shares, while FIIs own 10% and DIIs own 7%, CEO owns 2% and the rest 6% is owned by retail investors. There is low free float available in the market hence the stock price is not prone to much volatility unless there are big transactions from FIIs or DIIs.
The promoters have not diluted the stock since IPO, not taking any Dividends and investing the entire profits for growth and expansion which shows their strong conviction and commitment to the company.
The company has consistently been adding new stores in the last 10 years and been growing revenues at a rate of more than 25% CAGR since inception.
DMart currently operates around 377 stores across India and is aiming to add 40-50 stores per year. With strong presence in Maharashtra (112), Gujarat (61), Telangana (42), AP (37), Karnataka (34), TN (23), MP (22), RJ (17) Punjab (13), NCR (9) & others.
Remember that Walmart operates 10,500 stores across the world while it operates 4,600 stores in the US with a population of 330 Million, imagine the growth potential DMart has by operating on the similar business model.
The companyās unique selling point (USP) is its huge land bank in major metros and tier 2 cities, it owns and operates the stores which saves a lot of lease rental expenses. Also focusing on improving its e-commerce app DMart Ready.
It follows a cluster-based expansion approach for penetrating areas where they are already present, before expanding to newer regions, this provides a huge competitive edge.
The stock has recently corrected by 27% within a month, since the growth has slowed down in the recent quarter and the company acknowledged that its large stores in the tier-1 cities are facing competition from the quick commerce companies.
Quick commerce companies are currently trying to match the prices comparable to the retail stores along with free deliveries in 10-15 minutes. For this they need to burn huge VC money for rapid top line growth and exploit manpower.
I believe this is an unsustainable business model, once the VC money inflow stops they have to hike prices to become profitable to survive. Once the prices are no longer matching the retail stores their business declines and may get acquired or go bankrupt.
Groceries are essential commodities which have very thin profit margins, unlike food delivery business where the margins are high. Zomato and Swiggy have already burnt their hands in the food delivery business and learnt thatās not sustainable and hence pivoted to quick commerce.
With rising food inflation the majority of the population looks to buy groceries on a monthly basis where the provided discounts are high. Only the affluent population looks for convenience over the price which is around 1-2% of the overall population.
While quick commerce businesses may continue to exist parallelly but beyond a certain point, their growth would be limited. While the retail stores expansion continues beyond tier-1 to tier 2 & 3 cities.
The stock has been consolidating in the price range of 3300-4500 since the last 3 years. Once these fears are taken off it may break this price range and start a new rally, I donāt know when that will happen but when it happens it may provide a 2-3X return from the current levels with low risk/reward ratio.
Remember Warren Buffettās saying - to be greedy when others are fearful. That truly applies to D-Mart at current competition fears and hype created by the Zomato stock rally and Swiggy upcoming IPO.
Happy investing in Dmart
Disclosure: accumulating DMart in small quantities with a long term view.
